Padkohe Pty Limited & Anor v Deborah Jayne Fletcher & Anor [2006] NSWSC 102

New South Wales Supreme Court

CITATION : Padkohe Pty Limited & Anor v Deborah Jayne Fletcher & Anor [2006] NSWSC 102

HEARING DATE(S) : 7 February 2006

JUDGMENT DATE : 7 February 2006

JUDGMENT OF : Brereton J

EX TEMPORE JUDGMENT DATE : 02/07/2006

DECISION : Paragraph [43].

CATCHWORDS : EQUITY – Fiduciary Obligations – Constructive Trust – where defendant exploits commercial opportunity introduced by plaintiff on basis that it be exploited for ultimate benefit of plaintiff - where opportunity not available to plaintiff - INJUNCTIONS - Interlocutory injunctions - irrelevance of sufficiency of damages where claim is in equity's exclusive jurisdiction - balance of convenience - where risk that injunction might establish breach of condition of defendant's licence

Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384 Chan v Zacharia (1984) 154 CLR 178 CASES CITED : Keech v Sandford (1726) Sel Cas Ch 61; (1726) 2 Eq Cas Abr 741; [1558-1774] All ER Rep 230; (1726) 25 ER 223 Padkohe Pty Ltd v Fletcher [2006] NSWSC 20 United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1

PARTIES : Padkohe Pty Limited & Anor Deborah Jayne Fletcher & Anor

FILE NUMBER(S) : SC 5298/05

COUNSEL : R R I Harper SC (D) R Colquhoun (Resp)

SOLICITORS : Ms S Hutton (P)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRERETON J

Tuesday 7 February 2006

5298/05 Padkohe Pty Limited & Anor v Deborah Jayne Fletcher & Anor JUDGMENT (ex tempore) 1 HIS HONOUR: On 1 October 1998, Ms Dodds and the second plaintiff, Mr Davis Davis, leased from Bostaran Pty Limited premises known as The Basement at 169 - 173 Darlinghurst Road, Darlinghurst for a term of two years, apparently with an option to renew for three years. On or about 1 October 1998, Mr Davis purchased certain fixtures and fittings in those premises for a price of $15,000. Ms Dodds and Mr Davis conducted from the premises the business of Tatler Dining Room, commonly known as Tatlers. 2 On 1 October 2000, Ms Dodds leased The Basement from Bostaran under lease registered number 7515827V, for a term of three years expiring on 30 September 2003. During that lease - so far as I can tell, on or about 3 July 2003 - Bostaran transferred the property, of which The Basement forms part, to BG Property Investments Pty Ltd. 3 Ms Dodds and Mr Davis were married in 2001 but separated in 2003 in circumstances which the evidence, so far as it goes, suggests were and remain acrimonious. After their separation, Mr Davis continued to operate the business of Tatlers. On 27 September 2004 he registered in his own name the business name "Tatler Dining Room", the business of which was described as "private dinner parties and bar hire". He paid the rent for the premises to the lessor. 4 Throughout the period of these leases, the managing agent was Hayek Real Estate. On 4 March 2005 Ms Dodds notified Hayek that she would be vacating The Basement by 8 April 2005. Mr Davis says that in March 2005 he cleaned The Basement and replaced contents which had been removed by Ms Dodds with his own, with the assistance of one Betty Fletcher, the mother of the first defendant, Deborah Jayne Fletcher. 5 Also in March 2005, Mr Davis commenced negotiations with Hayek for a new lease of the premises, through the intermediation of Ian Graham and Gary Stewart of Mendika Liquor Services, or as they are in the evidence sometimes described, Mendika Law. In the course of those negotiations he was, at some stage, told that a bond of $20,000 would be required. It seems that he was not in a position himself to provide such a bond, a matter which he mentioned to Betty Fletcher and subsequently to her daughter Deborah Fletcher, who was qualified to be a licensee. He approached Deborah Fletcher with a proposal that she become manager and licensee of the premises when they reopened, for a retainer of $500 per week and $20 per hour worked, and asked whether he might borrow $20,000 from her partner, one Peter Baker, as it seems Betty Fletcher had suggested might be possible. 6 In due course, Mr Baker appears to have agreed to lend Mr Davis the $20,000, but Mr Baker insisted that Deborah Fletcher's name be on the lease "to protect my investment". Mr Davis says that he replied that he did not mind Ms Fletcher being a signatory to the lease, but that he did not want partners, and that the loan would be a short term loan repayable in instalments over six months. He says that he proposed that the lease be in the name of a company, of which Deborah Fletcher could be the director. 7 Ms Fletcher's version differs somewhat from Mr Davis' version. One significant discrepancy between the versions is that, on her version, it was proposed that in return for advancing the $20,000, she and Mr Baker would be entitled to half the profits, although it is unclear whether that was to relate to the term of the loan, or to the term of any lease, or to some other and if so what term. However, it is clear enough on Ms Fletcher's own version that she understood that the proposal was one under which the benefit of the lease was ultimately to be for Mr Davis, and the lease would be in her name (or in the name of a company of which she was a director) to "protect" Mr Baker's loan. 8 Mr Baker proposed that an existing company be used, and it would seem that this was a reference to a company Urban Infrastructure Pty Limited, of which Ms Fletcher was sole director, and another company, controlled by Mr Baker, was the sole shareholder, through which they together conducted the business of Tiger Baker's Cafe. On 30 March 2005 Heads of Agreement were issued, presumably by the lessor's solicitors or agents, which identified Urban Infrastructure as the lessee. By 12 April 2005, Mr Baker had paid $25,000 to Hayek, $20,000 for the proposed bond and a further $5,000 for the first month's rent. Mr Davis told Mr Baker that he would add the $5,000 to the loan, and repay it as quickly as possible. 9 During April, Ms Fletcher became aware of some apparent police interest in the premises, relating to allegations of illegal drug use or dealing in the past. 10 Mr Davis informed Ms Fletcher that there was some problem with using Urban as the lessee and that he would set up a separate company, to which Ms Fletcher says that she responded that that was acceptable, so long as she was a director and shareholder. On 29 April 2005 Mr Davis acquired the first plaintiff, Padkohe Pty Ltd, with Ms Fletcher as sole director and secretary, and his own mother and a company associated with Mendika, namely Chinatown Cellars Pty Limited, as the shareholders. 11 According to Mr Davis, whose evidence on this topic is not contradicted, on 30 April 2005 a function was conducted at Tatlers at which he was assisted by Mr Baker, Ms Fletcher and others, and at which Mr Baker's credit card machine was used to receive credit card payments, the proceeds of which Mr Baker retained and acknowledged would be treated as part repayment of the loan. 12 In early May 2005, Ms Fletcher and Mr Davis met at the offices of Mendika, with three solicitors of that firm. A draft lease was produced, which showed the name of the lessee as Urban Infrastructure. In the course of the meeting, the lessee was changed from Urban Infrastructure to Padkohe, and Ms Fletcher was asked to execute the lease, Mr Davis says, in her capacity as a director of Padkohe. In any event, she executed the lease, which also named her as a guarantor. It was for a term of five years with an option to renew for a further five years. Ms Fletcher says that she executed the lease upon the assumption that she was the - and, I infer, the sole - director and shareholder of Padkohe. 13 Shortly thereafter, Mr Baker inspected the lease and discovered that Ms Fletcher was not a shareholder in Padkohe at all. Mr Baker and Ms Fletcher spoke to Mr Davis, and Mr Baker said that he could not believe that Ms Fletcher had signed the lease in circumstances that she was not a shareholder of the company. He demanded his money back - presumably, the $25,000. 14 Sometime later, Mr Davis proposed that Chinatown Cellars would advance the money to enable Mr Baker to be repaid, and it seems that Mr Baker agreed to allow a little time for this to happen. Several conversations took place in which, in effect, Mr Baker suggested that if the $25,000 was repaid, he and Ms Fletcher would walk away, while Mr Davis said that he had (or was finding) and would pay the money. 15 By sometime in May - the evidence varies as to whether it was 13th or 20th - Mr Davis told Mr Baker that Chinatown Cellars could not put up the money, and having asked for an opportunity to see if he could find the money elsewhere, was told by Mr Baker that if the money was not produced by 12.30 the following Monday, then Mr Baker would take over the lease in order to protect his money, to which Mr Davis says that he responded "That would be a good thing because I'll be able to repay the money and then we can change the name over". 16 Ms Fletcher says that on about 15 May the managing agent approached her, and in circumstances that a lease with Mr Davis had not been concluded, offered her the opportunity of taking the lease; she accepted that offer. The second defendant Tatlers.com.au Pty Limited was incorporated by Ms Fletcher on 16 May, and a lease of the premises was granted to that company as lessee, on which stamp duty was paid on 20 May. According to Mr Davis, in a conversation with Ms Fletcher on the afternoon of 23 May, having found that the locks to the premises had been changed, she said "The deal's done", or words to that effect. 17 The following day, Mr Davis says he had a discussion with Ian Morgan, an associate of Ms Fletcher and Mr Baker, which led to a further meeting on 26 May in which Mr Morgan is alleged to have said that Mr Davis would be best just to forget about it and to pursue his interest in the Cauldron, another business conducted by him. 18 On 29 May, Ms Fletcher wrote to ASIC, claiming that she had never consented to be a director of Padkohe and was resigning as such. 19 Since June 2005 a business has been conducted from the premises by Ms Fletcher under the name of Tatlers. Telephone calls to the premises have apparently been answered "Tatlers". On 26 September 2005 a caterer's licence for the premises issued in Ms Fletcher's name. Ms Fletcher's name is displayed on the premises as licensee. 20 On 14 July, Padkohe lodged a caveat claiming to be the beneficial owner as lessee under an unregistered lease, in circumstances that Ms Fletcher had negotiated on behalf of Padkohe for the lease but had taken the lease for herself, with the result she was said to hold the lease on constructive trust for Padkohe. 21 Padkohe and Mr Davis commenced their proceedings by summons filed on 7 October 2005, claiming a declaration that Ms Fletcher and Tatlers.com held upon trust for them all leasehold or other interest held or acquired by them in The Basement and all the profits of trading activities conducted by them in and from the premises since 1 April 2005. A Statement of Claim was filed on 10 January 2006. 22 It seems that a lapsing notice in respect of Padkohe's caveat was served on Padkohe on 9 January 2006, at the instance of the registered proprietor of the land, BG Property Investments. The plaintiffs filed a Notice of Motion claiming an order extending that caveat on 30 January 2006, but that being the last day before the caveat lapsed, and the motion not having been served, relief was declined [Padkohe Pty Ltd v Fletcher [2006] NSWSC 20]. The plaintiffs filed a further motion on 2 February 2006, in which they sought leave to file a further caveat. That application came before Campbell J as Duty Judge on 2 February, when his Honour made an order that until 6 February 2006, Ms Fletcher not deal, nor allow or permit Tatlers.com to deal, in any way, with the leasehold estate or interest held by Tatlers.com without prior consent of the plaintiffs or further order of the Court, provided that that order should not prevent the registration of the lease already executed of the premises to Tatlers.com. Mr Harper, of Senior Counsel, who appears for the defendants, has pointed out that that order was made in circumstances which were, in effect, an ex parte application, and in which it is contended that there was an agreement that no order would be sought, and, save as part of the chronology and as being relevant to any question of delay, if it were raised, I have not otherwise given any weight to the circumstance that that order was made. 23 Although there is a degree of controversy, the following matters of fact appear at this stage to be, at the very least, seriously arguable. First, the commercial opportunity of obtaining a lease of The Basement was obtained, and introduced to Ms Fletcher, by Mr Davis. Secondly, Mr Baker - not Ms Fletcher - advanced $25,000 to Mr Davis, as a loan. Given Ms Fletcher's version it is clear that this was intended to be a loan, and not a purchase of equity in the venture. Thirdly, Ms Fletcher executed the lease in her capacity as a director of Padkohe. Her affidavit evidence that she did so upon the assumption that she was a shareholder amounts to an acknowledgment that she was aware that she was executing as a director of Padkohe, notwithstanding her subsequent protestation to ASIC that she did not believe she had consented to be a director of that company. 24 Fourthly, no party intended that Ms Fletcher or interests associated with her be entitled to the benefit of the lease to the exclusion of Mr Davis or interests associated with him. At the highest, there was a venture in which both Ms Fletcher and Mr Davis were involved, which involved procuring, at least in part if not exclusively for the benefit of Mr Davis, the lease of the premises. The arrangements between Mr Davis and Ms Fletcher had, as their minimum content, that it was never intended that Ms Fletcher would benefit from the lease to the exclusion of Mr Davis. 25 Fifthly, notwithstanding all that, Ms Fletcher has incorporated or acquired Tatlers.com, and has taken over the lease in the name of that company, and denies that Mr Davis has any interest in the lease or the premises. 26 In his work Fiduciary Obligations, Professor Finn, as his Honour then was, explained that a person was not permitted to use, for his or her own advantage in purchasing a property, information or knowledge of it acquired in the course of a confidential dealing with it for another's benefit. As he wrote in paragraph 392: For several centuries at least, the courts have refused to allow a person to use for his own advantage in purchasing property, information or knowledge acquired about that property, if it was acquired as result of or in the course of some confidential dealing with that property for another's benefit. That other, and not he, is entitled to the benefit of that information in any dealing between them. The possibility that such knowledge or information could be so acquired and misused has led the courts to impose an exacting standard of proof upon the confidential purchaser if he wishes to maintain his purchase. This proof stems from the broad equitable rule that: Whenever a person (F) is acting or has acted in a confidential position for another (B) in relation to specific property, any purchase by F of that property for himself or for another is voidable at the suit of B unless F can show that B was aware and consented to F's dealings, and can prove that the transaction was fair, ie (1) that full value was given to the property; and (2) that he disclosed to B any and all the information which he has acquired concerning the value of the property, and concerning the contract itself. 27 Meagher, Gummow and Lehane, in Equity: Doctrines and Remedies, explain that a fiduciary may not purchase for himself or herself property which he or she ought to have purchased, if at all, for the principal. They put the proposition in these terms: A fiduciary may not purchase for himself property which he ought to have purchased for his principal. Here, of course, there is little difficulty with the question, who is a fiduciary? The principle applies to a person who is bound to purchase a property on behalf of or for the benefit of another; or perhaps, who is bound, if he purchases the property at all - he may not be obliged to do so - to purchase it for the benefit of or on behalf of another. Thus, if A instruct B to purchase Blackacre on A's behalf, and B purports to purchase Blackacre for his own benefit, B will be held constructive trustee of Blackacre for A. 28 A slightly different application of an analogous principle in the context of joint ventures can be seen in United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1, at 12 - 13 in which Mason, Brennan and Deane JJ, adopting the words of Dixon J in Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384, at 407 – 408, explained that where two persons propose jointly to support a commercial opportunity, and is obliged to exploit the opportunity only for their joint advantage, and not to pursue for itself and separate collateral benefit at least without the informed consent of the other. Their Honours said: The participants in each of the then proposed joint ventures were `associated for ... a common end' and the relationship between them was `based ...upon a mutual confidence' that they would `engage in [the] particular ...activity or transaction for the joint advantage only'. It matters not, for present purposes, whether that relationship is seen as that which may exist between prospective partners or joint venturers before the terms of any partnership or joint venture agreement have been settled or whether it is seen as a limited preliminary partnership or joint venture to investigate and explore the possibilities of an ultimate joint venture or ventures. On either approach it is a fiduciary one. That being so, the proposed participants in each joint venture were under fiduciary obligations to one another in relation to the proposed project at the time when the first of the mortgages was given and accepted. In particular, each participant was under a fiduciary duty to refrain from pursuing, obtaining or retaining for itself or himself any collateral advantage in relation to the proposed project without the knowledge and informed assent of the other participants. 29 On the matters of fact to which I have referred, in my opinion the following propositions are seriously arguable. First, Ms Fletcher was acting in a position of confidence for Mr Davis and Padkohe, or at least was acting jointly with them in an enterprise intended to provide benefits for all of them, in obtaining and executing, on behalf of Padkohe, a lease of the premises. Secondly, Ms Fletcher, through the second defendant Tatlers.com, has acquired a lease of the premises as a result of, or in the course of those confidential dealings. Thirdly, the lease so acquired excludes any benefit to Mr Davis or his interests. Fourthly, no, let alone fully informed, consent was obtained from Padkohe or Mr Davis for that course. 30 It follows that, having regard to the principles apparent from the authorities to which I have referred, there is a seriously arguable case that Ms Fletcher was not entitled to take for herself the commercial opportunity which was introduced by Mr Davis and accordingly that the defendants hold on trust for the plaintiffs the benefit of the lease which they have obtained, or at the least are liable to account to the plaintiffs for the benefits derived by the defendants from and under that lease. 31 Great weight has been given in the course of argument to the circumstance that the caterer's licence obtained by Ms Fletcher in respect of the premises contains conditions which include: That the person known as Davis Davis ... has no direct or indirect financial interest in the premises and has no direct or indirect interest or otherwise in the day-to-day operation and management of the subject licensed premises. 32 That licence is, as I have said, dated 26 September 2005 and follows by some months the acquisition by the defendants of their leasehold interest. As is well established, a fiduciary is accountable for any benefit acquired by virtue of its position, even if that benefit would not have been available to the principal. That proposition, of course, is established by the well-known case of Keech v Sandford (1726) Sel Cas Ch 61; (1726) 2 Eq Cas Abr 741; [1558-1774] All ER Rep 230; (1726) 25 ER 223, and is repeated by Deane J in Chan v Zacharia (1984) 154 CLR 178. A fiduciary cannot avoid an obligation to account by retrospectively, by arrangement with the person from whom it acquired its interest, making the existence of that interest or part of it conditional on the beneficiary not having an interest. 33 In any event, the condition attaches only to the caterer's licence, and while no doubt the licence adds value to the occupation of the premises, the condition does not attach to the acquisition of the leasehold interest, which is the foundational subject matter of the plaintiff's claim. Accordingly, I do not think that the condition in the licence can exclude any proprietary interest which Mr Davis or Padkohe may have in equity in the lease. 34 I am satisfied, therefore, there is a serious question to be tried to the effect that the defendants hold the leasehold of the premises upon trust, at least in part if not in whole, for the plaintiffs or either of them. That is not to deny that the defendants might be entitled to some allowance for the expenditure made by them in improving the premises. 35 It has been suggested that damages would be a sufficient remedy. However, in a case such as the present, where what is sought is an injunction not in equity's auxiliary jurisdiction in aid of a common law right, but in its exclusive jurisdiction in aid of an equitable right, the sufficiency of damages is not an answer to a claim for injunctive relief. Prima facie, the beneficiary's right in a case such as the present is to a proprietary remedy. Moreover, this is a case where the interest is one in land, albeit a leasehold interest, in respect of which equity even in its auxiliary jurisdiction takes the view that damages are almost never a sufficient remedy. It may well be that ultimately the plaintiffs will not be able to compel a transfer to them of a legal leasehold interest in the premises. But that does not mean that they will not be able to sustain a proprietary remedy in the nature of a constructive trust or charge, which might well be superior to an award of compensation which is unsecured. The ability of a beneficiary to trace the trust property is also a superior remedy to a mere award of equitable compensation. In addition, the ability of a beneficiary to quantify and value any charge or equitable compensation might well be jeopardised if the leasehold interest were alienated in the meantime. 36 I cannot, therefore, be satisfied that a final proprietary remedy would be declined on the basis that damages are a sufficient remedy, and I would therefore not decline interlocutory relief on that basis. 37 So far as the balance of convenience is concerned, it is submitted that there is no present risk of alienation of the subject property. That may be so, but it is clear enough that a lapsing notice was served - although not by the present defendants, but by the proprietor - and that there has been no offer to give any notice of any intended future alienation. The absence of any present intention to alienate the leasehold interest or the business, means that no inconvenience is occasioned to the defendant in that respect from the grant of an injunction restraining it. In the context of this case, the course of events to date coupled with the absence of any assurance that there will not be any dealing sufficiently established a basis for injunctive relief. 38 More significant is the potential jeopardy to the licence which might be occasioned by a suggestion that Mr Davis has an interest of some sort in the premises or the business. But this judgment, of course, does not involve any conclusion that he has such an interest. It involves accepting only that there is a seriously arguable case that he has. On the other hand, the defendants - in particular, Ms Fletcher, who is the licensee under the licence - deny that he has. If, ultimately, it be found that Mr Davis has an interest, it would be one of those constructive trusts which are imposed despite the intention of the trustee that the beneficiary have no interest. 39 Given the interlocutory nature of this determination, I do not think that the grant of an injunction establishes or evidences an infringement of a condition of the licence. But even it were to do so, in circumstances where those conditions have been retrospectively accepted by Ms Fletcher, on balance, I do not think that is sufficient reason to refuse an injunction when, if an injunction were not granted, there is a risk that the potential proprietary interests of Mr Davis or Padkohe in the premises could be defeated by alienation. 40 The undertaking as to damages already given by the plaintiff extends to cover any interlocutory continuation or variation of the injunction already pronounced by Campbell J. Mr Harper submitted that the undertaking as to damages might be worthless, and relies on evidence which suggests that Mr Davis has no real property in New South Wales. That evidence was adduced in circumstances where Mr Davis had little opportunity to respond to it. While this is not a case in which I would consider dispensing with an undertaking as to damages, I am not inclined to the view that this is one in which a case has so far been made that security for that undertaking should be required. 41 My orders are:-